The IMF is at its weakest just as the world needs it most

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Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

In a globalised and dynamic economic system, there is a powerful and controversial organisation that has the economic firepower to bail out entire countries: the International Monetary Fund. The IMF plays an important role in the world but recent events have divided its members and weakened its potential to fulfil its role, threatening its very existence.

The creation of the IMF and the World Bank, two distinct but complementary organisations, was signed off at a conference in Bretton Woods in July 1944. That was near the end of World War II, when an air of international cooperation and solidarity blew across many nations that had allied to defeat Nazism. The IMF was designed to be independent yet accountable to the member countries – 189 today – that provide funds and elect its managing director, currently Christine Lagarde.

Its mandate is wide but the most important function is to act as the lender of last resort for economies that cannot secure borrowing at reasonable rates from the international money markets.

Historically, most clients of the IMF have been developing countries, but the 2008 financial crisis brought a sudden halt to the bank financing that kept the economies of the eurozone periphery ticking over. The IMF was called to help a number of these developed countries: Portugal, Ireland, Cyprus and Greece. And this is where the problems started.

Anti-austerity protestors in Portugal, 2013.EPA/JOSE SENA GOULAO

Loss of credibility

Difficulties in Greece and political pressure from powerful eurozone countries forced the fund to break its long-established and strict rule never to refinance a country’s debt if that debt is unsustainable. In other words: don’t give money if they won’t pay you back.

The primary objective, then, was to prevent the bankruptcy of a eurozone member, or at least postpone it until the others were strong enough to take the hit. The toxic Greek debt that had found its way to fragile banks throughout the currency union had to be “managed”, at least until European governments had compartmentalised it and some optimism and investment had returned to their economies.

Some member countries rightly observed that in Greece, the fund was using precious money from poor countries to support a relatively wealthy country. There was also a good chance that the money would be lost when eventually the Greek debt is written off.

The economic policies signed off by the IMF were also ineffective and possibly even counterproductive in the Greek case. There were disastrous miscalculations of the impact of various measures and, more importantly, a “quick-fix” approach that primed counterproductive increases in taxation instead of the deep structural reforms that were needed.

To be fair, Greek governments doggedly sought to avoid reforms that would entail political cost, but the IMF seemed to sign off policies that would sweep the Greek problems under the carpet rather than dealing with them.

Tensions

The Greek drama has aggravated a longstanding divide between the developed and developing country members of the IMF. For many in these emerging nations, the IMF has acted as a Western Trojan horse to subjugate the sovereignty and exploit the resources of countries in need.

They have a point. IMF policies invariably cause social dumping – the drafting in of low wage labour – that is beneficial to larger businesses. Former US president, Bill Clinton, criticised the IMF for causing starvation in countries it has been involved with. Robust research has linked IMF policies to weakening health systems and thousands of deaths, and to the suppression of labour rights. There is even evidence that IMF-sanctioned policies harm the environment, for example in Ecuador.

In granting loans, the IMF will push for trade liberalisation and the opening up of markets to international competition. But if this happens under unfavourable conditions it can lead to the extinction of the local industry and unfavourable terms of trade. Not even countries with strong industries have fully liberalised their trade.

Grievances from developing countries are further validated by the IMF’s voting system, which favours the West: European countries together have about a third of the voting rights while their weight in the global economy is much smaller. China controls only about 6% of the votes. It is no coincidence that the managing director, the fund’s boss, is invariably a European.

Former IMF chief Dominique Strauss-Kahn heads to court in 2015. He was acquitted of charges that he instigated sex parties with prostitutes.EPA/YOAN VALAT

These pressures come at a tricky time, for right now you could argue that the IMF has never been so needed in the global economy. In a world that is becoming increasingly dynamic, globalised and at the same time nationalistic, The IMF, the World Bank and the World Trade Organisation are still emblems of global co-operation and confidence. Without an institutional lender of last resort, nations will be at the mercy of panicky and greedy markets or, even worse, at the mercy of other nations. The existence of added risk in the global monetary system will eventually transform into fewer transactions and higher premiums, harming everybody.

Yet if the IMF is to fulfil its role, and indeed survive, it needs to change, and faster than it so far has. A good start would be going back to the ancient Greek basics: more equal voting, policies that respect the needs of local communities and rules that apply to everyone, weak or strong.